Death by 'capacity factor': Is this how wind and solar ultimately win the game?

This is little understood, but important

Those who don't think renewable energy will amount to much usually have a few arguments. Price used to be a big one, but the costs per watt for wind and solar has come down so much in the past few decades that this is becoming less of an issue. According to a new report by Bloomberg New Energy Finance (BNEF), wind power is now the cheapest electricity to produce in both Germany and the UK, and that's without government subsidies, and it became the cheapest electricity in the U.S. last year, including subsidies. Solar has gotten there too in some places, especially with some subsidies, and it's only a matter of time before it gets there without subsidies (which aren't the problem that some claim, if we remember how much support fossil fuels have gotten and still get). The trend is clear: The efficiency of wind turbines and solar panels is going up, and their prices are going down.

The next big argument is intermittency. This article isn't about that, so I won't go into detail, but let's just say that there are many ways to mitigate the problem: Grid-scale storage is coming down in price (from the Tesla Energy batteries to grid-scale liquid metal batteries), someday we'll have millions of electric cars with vehicle-to-grid (V2G) technology that act as a kind of giant distributed battery (people will get paid to rent out a few percents of their batteries to absorb grid variations), interconnected smart grids will be able to shift energy from regions where there's a surplus of sun and wind to those where there's a deficit, dynamic pricing will help demand stay closer to supply, etc. All very interesting stuff, but let's move to the next point, which is probably the least understood.

SR/Promo image

Then we come to the real Achilles' heel of renewable energy: their relatively low capacity factor. What this means in practice is that if you build a solar system with a capacity of 100 megawatts, in practice it won't produce energy at that level all the time. So you might get 100 MW out of it when the sun is out, but at night or on cloudy days, you don't. If you average it all, you might only get a 20% capacity factor. But don't worry, when we look at the cost of 1kWh of wind or solar, we're talking about actually produced energy, so the capacity factor is embedded in that price.

The reason why this matters so much has to do with one of the big strengths of wind and solar: Once the wind turbines or the solar panels are installed and paid for, the power produced has basically a marginal cost very close to zero.

It's very hard for a grid operator or power company to say no to free power once it has access to it, so that clean energy takes precedence on more expensive power from coal and natural gas plants.

As Bloomberg explains: "It’s a self-reinforcing cycle. As more renewables are installed, coal and natural gas plants are used less. As coal and gas are used less, the cost of using them to generate electricity goes up. As the cost of coal and gas power rises, more renewables will be installed."

The table above shows how the capacity factors of coal and natural gas are starting to be affected, while wind and solar are starting to do better because bigger and taller wind turbines catch more wind and more solar is being installed in the U.S. Southwest where sunny days are more frequent.

It's kind of like a flywheel, and the more solar panels we install, the more wind turbines are built, the faster it spins. At some point, doesn't make any sense to run fossil fuels on sunny or windy days, and overall capacity factors go down enough that prices are simply not competitive with storage, and rather than build new natural gas plants, utilities will simply buy more renewables combined with storage.